JERUSALEM — When several hundred people took to the streets a few days ago to protest the government's harsh new austerity program, people like Michel Biton could see everything that they had worked for slipping away.

Biton is a vocational counselor in the poor south Jerusalem neighborhoods known as Katamon 8 and Katamon 9. He has lived there since his family emigrated from Morocco in 1962, when he was 7, and he has first-hand experience with the neglect that helped to turn the district into a symbol of urban blight as well as the more recent, modestly successful efforts to rehabilitate it.

But now, as Israel slips deeper into economic crisis, Biton is despondent.

"In three or four years," he said, "the whole situation in this neighborhood will degenerate back to what it was before we started."

On July 1, the government announced an immediate 24% increase in the prices of goods and services, a three-month wage-price freeze, an 18% devaluation of the Israeli shekel, a 3% cut in public-sector employment and new cuts in the government budget. The aim is to reduce Israel's inflation rate and protect its dwindling reserves of foreign currency.

Real Income Expected to Fall 30%

The government concedes that the austerity program is expected, by October, to reduce the average Israeli's real income by 30% from what it was at the beginning of the year. Critics of the program say the reduction will be closer to 50%.

The poorest Israelis are supposed to be protected against the program's impact, but, in neighborhoods like the Katamons, there is little faith that the economic burden will be shared equally by rich and poor.

"These people have run out of air to breathe, and the only thing left to them is to fight," said Yamin Swissa, a self-described thief-turned-politician who was one of the organizers of the neighborhood street demonstrations that erupted after the austerity program was announced. Fifteen persons were arrested and four riot police officers injured in that disturbance.

Swissa, 30, is now urging his neighbors to join him in what he calls a tax revolt. He is asking them to refuse to pay their taxes, rent and utility bills--any money due the government.

Unrest in the Katamons underlines the risk that the government's economic program will aggravate old divisions between what has been called First Israel and Second Israel--on the one hand, the educated middle- and upper-class Israelis, many of them from European or North American backgrounds; on the other, the poor, less educated Israelis whose families came mostly from North Africa and the Arab countries.

The Katamons have been in the forefront of this issue for years. They are among the neighborhoods hastily developed to accommodate the influx of immigrants in the years just after the birth of modern Israel in 1948. Most of the newcomers were Sephardim, from North Africa and the Middle East, in contrast with the Ashkenazim pioneers who came mostly from Eastern Europe.

Katamon 8 and Katamon 9, the last of these neighborhoods, date from the early 1960s. They are the most rundown.

"The basic construction of these buildings is absolutely horrible," said Ozzie Samuels, a social worker in the neighborhood.

The 600- to 800-square-foot apartments, with two or three rooms, leak so badly that mold and mildew are chronic problems. In the winter they are almost impossible to heat.

Residents call a series of long, low, prefabricated concrete and brick apartment buildings forming the perimeter of Katamon 9 "the trains," because they look a bit like a string of railroad cars.

Their undersized windows resemble portholes. "They're only for rifles," one former resident said, who pointed out that, when the apartment buildings were put up, they looked out over a valley that was Jordanian territory.

This was the home of the Israeli "Black Panthers," who in the early 1970s adopted the name and some of the methods of the militant black American group to draw attention to the blight in which they lived.

"It was the first time there was civil disobedience in Israel, and it really shocked the hell out of the Establishment," Samuels said.

With the help of an outside director, an improvisational neighborhood theater group created a routine called "The Dropout" based on the Katamon experience. Alice Shalvi, a sociologist at Hebrew University who worked in the neighborhood in the early 1970s, talked about it.

"It followed the progress of a child from not doing well at school to being chucked out of school by the teacher and sent home, through a process of delinquency into prison and finally (after a prison rape) suicide," she said. "It was a very grim portrayal."

Police officers and social workers came frequently to the Katamons then, but only in pairs. It was not safe to come alone.